Finance – Funding For New Business - Part 2

2.1 Introduction of Funding of UK SME

Department for Business Innovation & Skills (2013) presented an overview of funding available for businesses in UK. The authors emphasized that choosing a funding method is crucial for further development of a company. Department for Business Innovation & Skills (2013) stated that the UK government stimulates SME activity in UK by offering new funding schemes and modifying old funding schemes.

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Freeman (2013) attempted to attract attention to the problems of funding SME in UK as they the major contributors to the national economy. Freeman (2013) paid much attention to non-traditional lending aiming to address challenges faced by SME. However, Freeman (2013) rejected subsidizing SME as a stimulating tool for businesses. Freeman (2013) developed a number of recommendations related preferences in funding new businesses.

Intellectual Property Office (2013) stated that UK government pays much attention to the development of innovation in UK. Intellectual Property Office (2013) presented a number of business supporting initiatives including funding that could help the companies maximize the value of their assets. Also, the authors succeeded to develop the model of funding new companies that started business in the field of innovations.

Gleeson (2011) considered the problem of lending money to new businesses by banks in UK. Gleeson (2011) offered an overview of the current situation in funding the new companies and emphasized the need in equity capital. Also, Gleeson (2011) stated that the number of angel investors is increasing with economic recovery. On the whole, the tendency to invest directly in small companies is growing. The article presented by Gleeson (2011) can be used to give the general idea about angel capital and funding the new companies in UK.

Wiltbank (2009) examined the opportunities of angel investment available for the new businesses in UK. Wiltbank (2009) stated that angel capital is an important source of funding new businesses. Also, Wiltbank (2009) provided an insight on investment outcomes to angel investing, characteristics of business angel investors, and the strategies to improve angel investing outcomes.

Mason and Harrison (2013) examined the impact of economic decline on funding new SME. Mason and Harrison (2013) stated that the economic decline made negative impact on venture capital and bank lending. According to Mason and Harrison (2013), government intervention in the field of funding new companies made positive impact on availability of debt and equity capital. The authors also offered comprehensive statistics on venture investments and angel capital. Also, Mason and Harrison (2013) described investment activity in UK targeting angel business supporting their arguments with empirical evidence.

Mason and Harrison (2011) characterized investment activity in UK including investments in the new ventures for the period from 2008 to 2009. Mason and Harrison (2011) stated that equity financing is preferable in funding the new companies. Equity financing brings good returns to the investors. Mason and Harrison (2011) emphasized that the investors tend to invest in the business that do not relate their families and prefer to be involved in these businesses.

McKaskill (2009) emphasized vital role of angel capital in funding new businesses and developed recommendation for future business owners. McKaskill (2009) also stated that not only funding is crucial for developing new businesses, but mentoring and strategic decisions provided by investors.

Howells, Miller and Fox (2012) emphasized the importance of angel capital in starting new businesses and analyzed risk level when funding the new companies. Howells, Miller and Fox (2012) stated that funding new businesses is motivated by expected returns and opportunity to take part in management of the new companies.

Mason and Harrison (2002) argued that the supply side of the capital market is not a problem. On the contrary, the problem relates the constraints connected with meeting investment criteria. Mason and Harrison (2002) concerned about quality of investments and emphasized the role of government in financing start-ups.

Harrison, Mason and Smith (n.d.) extended the literature related decision-making process in the field of investments. The outcomes of Harrison, Mason and Smith (n.d.) were based on entrepreneurial learning theory. Harrison, Mason and Smith (n.d.) stated that business angels can be divided into three groups presenting some evidence.

Harrison & Mason (2000a) devoted their research to formal and informal markets of venture capital. The study explored the interaction between the informal and formal capital for the new start-ups and revealed the opportunities for further collaboration. Harrison & Mason (2000a) presented evidence from surveys of angel businesses and managers of capital funds related the types of collaboration available to formal and informal sources of funding.

Mason and Harrison (2000b) attempted to identify size of the new companies financed through informal capital using three method of valuation. Mason and Harrison (2000b) used market-based, firm-based, and capture-recapture approaches to estimate the size of the companies. The author offered an insight on the market of informal capital. Mason and Harrison (2000b) revealed that in UK the new companies raise more capital from informal venture market than from institutional funds of venture capital.

Harrison & Mason (2008) measured the activity of business angel in UK market. They used the following approaches to measuring business angel activity including extrapolations, supply- and demand-side approaches, investment-oriented and hybrid approaches, angel syndicates, and tax incentives approaches. Harrison & Mason (2008) emphasized the necessity of publishing data related investment activity to enable policy-makers to monitor the results of government interventions in the market of investments.

Peters (2009) shed light on exit strategies that contribute to increasing capital for angel companies. Also, Peters (2009) described the changes in exit strategies that recently occurred and explained the benefits of shareholders from exit transactions. In addition, Peters (2009) stated that the management of a venture company is given full control over venture capital.

Thus, the fluctuations in the investment in SME in the UK are an indication of the changing trends and behaviors of investors at various periods. We can derive and deduce implications from this trend analysis to analyze what are the factors for UK investors; internal as well as external in deciding to invest in new and in progress startups.

2.2 Existing Forms of Funding a New Business

2.2.1 Friend and Family Capital

Hancock ISBE 2009 Conference (2009) investigated the opportunities of friends and family capital (F&F) for new start-ups. Based on the theory of agency costs, pecking order theory, static trade-off theory, and information asymmetry theory, Hancock ISBE 2009 Conference (2009) added to the development of the theory of F&F investments.

Mason (2005) paid attention to two sources of financing start-ups including family and friends capital and financing by other individuals. Mason (2005) conducted a global research that revealed the following: approximately 3.4% of the population tried to invest the businesses of their friends and relatives informally. Interestingly, approximately 1.1% of GDP of the countries examined provide capital for the new companies. According to Mason (2005), family and friends are the major providers of capital for the new companies.

Centre for Strategy & Evaluation Services (2012) provides the general overview of investment market and its characteristics. Centre for Strategy & Evaluation Services (2012) offered an assessment of the programs targeting the development of angel investment. The study examined the market for investments in EU and UK in particular. Centre for Strategy & Evaluation Services (2012) touched upon the advantages and disadvantages of using friends and family capital to invest in angel companies.

Terjesen (2011) considered equity financing issues in developing seed companies. Equity financing was divided by Terjesen (2011) into four stages explaining its role on every stage. Also, Terjesen (2011) distinguished between different forms of investments in terms of timing, amount, ownership type, contract type, payback, monitoring of decisions, and expectations related timing. Terjesen (2011) considered the issue of friend and family capital in details.

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Harper and Kelly (2003) considered the issues of using social capital including friends and family capital for investing in new start-ups. The issue of social capital was examined before using various approaches measuring different aspect of social capital. Harper and Kelly (2003) provided statistics of ONS related measuring social capital within the UK. This work helped assess volume of social capital in UK in comparison to other forms of angel investments. Foxton and Jones (2011) paid attention to the idea of social capital as a capital for raising funds for the new start-ups. Also, Foxton and Jones (2011) offered statistics related the volumes of social capital in UK. In addition, Foxton and Jones (2011) attempted to measure social capital available in UK.

As well as Foxton and Jones (2011), Edwards, Franklin and Holland (2003) researched the issue of forming family and social capital. Edwards, Franklin and Holland (2003) described how family capital is integrated in social and economic structures. Basu and Parker (n.d.) stated that in UK borrowing from family and friends is the second source of financing after bank loans. Basu and Parker (n.d.) identified the main determinants of family and friends capital. The research is based on empirical data related Asian entrepreneurs starting up businesses in the Great Britain.

Thus, borrowing from friends and family is one prominent source of financing for new firms. This might have various implications in different backgrounds; both positive and negative. The availability of funds in these forms may be tapped as an opportunity whereas it also increases the personal liability of the starters of businesses in the long run.

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